Is it time to install solar panels?
Using electricity to turn on the lights, run the air conditioner and dry clothes is becoming increasingly expensive. Last year, retail electricity prices in the country rose at the fastest pace since 2008 and reached a record 13.72 cents per kilowatt hour (kWh), according to the U.S. Energy Information Administration. The agency expects electricity prices to rise nearly 4% this year, so the economic impact to your pocketbook is likely to continue.
At the same time, the cost of generating electricity with solar panels that convert sunlight into energy has been declining for a decade. Ten years ago, an average 6 kWh residential solar system cost $50,000 or more. Today, however, a typical home installation costs between $16,200 and $21,400. This represents a reduction of more than 60%, according to Sunrun, a manufacturer of residential solar panels.
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To increase affordability, the federal government still offers a generous tax credit to homeowners who install solar systems, but the incentive program is scheduled to be phased out in 2024. Add to this the fact that homes with solar energy systems sell for 4.1% more, according to online real estate company Zillow, and renewable energy is more environmentally friendly, and the solar energy outlook is looking a little sunnier.
“The main reasons to power your home with solar are to reduce or even eliminate your electricity bills and to be more environmentally friendly by reducing your ecological impact,” says Nick Liberati, communications manager at EnergySage, a renewable energy marketplace that helps people compare solar projects.
In fact, a recent survey by SaveOnEnergy and CNET found that the main motivations for switching to solar were “saving money on electricity bills” (82%) and “environmental reasons” (65%).
So should you make the sacrifice, pay the upfront costs and switch to solar? It depends on a number of factors. Here’s what you need to know to make an informed decision.
Tax credits offset installation costs
If you want to reduce the cost of installing a rooftop solar PV system and shorten the time it takes for your investment to pay off, taking advantage of the federal government’s tax credit is key. It’s the best economic incentive for solar. Unlike a tax deduction, which reduces your taxable income, a tax credit is a dollar-for-dollar reduction in the amount of tax you owe.
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Currently, the government provides a 26% tax credit for systems installed between 2020 and 2022 and a 22% credit for installations completed in 2023. However, unless Congress renews the credit, it will expire in 2024. (Still, there is always the possibility that the solar investment tax credit could be extended, Liberati notes. President Biden’s Build Back Better Act, he adds, proposed a 10-year extension of the solar investment tax credit that would again increase the tax credit to 30%. However, it is unclear whether the bill will pass).
If you want to claim the tax credit, the solar installation must be put into operation during that tax year and must either generate electricity at a primary or secondary residence (such as a vacation home) in the United States, or be part of a community solar project where you subscribe to local solar farms for power. That means you won’t be able to take advantage of the credit if you bought solar panels and don’t install them by the end of 2023. You also have to own the system, which must be new or used for the first time, and you must pay cash or finance it.
Here’s how the savings are calculated. Let’s say it costs $20,000 to install a solar PV system by December 31, 2022. The tax credit would be calculated like this: $20,000 x 0.26 = $5,200. That means the actual cost of your system would drop to $14,800. “That’s a substantial reduction in out-of-pocket costs,” says Ben Airth, director of distributed generation policy at the Center for Sustainable Energy (CSE). You may also qualify for rebates from your utility, or state and local governments, as well as state tax credits. So do a little research to find out.
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If you want to get an idea of whether solar makes financial sense in your situation, enter your information into a solar cost “calculator,” such as the one offered by EnergySage. Estimates are based on your roof, your electric bill, and offers in your area.
Keep in mind that the solar investment tax credit is not refundable. That means that if the tax credit exceeds your tax liability, you won’t get a refund for the amount of the credit that exceeds your tax bill. However, you can apply any unused amount of the credit to the next tax year.
When would it be best to switch to solar?
While there is no universal answer as to what types of homes benefit most from solar panels, there are some key factors you should consider. For starters, it’s a big advantage to live in a state where the sun shines virtually all the time, such as Arizona, Florida and California. Also important is which side of the street you live on, since the more sun you get, the better.
“Generally speaking, owning a single-family, detached home with a south-facing roof that is in good condition and receives little shade is an optimal fit for solar use,” Liberati notes. Homeowners with high electricity costs are also good candidates, he adds, since the more you spend on electricity, the more you’ll save with solar.
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There are other benefits of solar that go beyond cost. One advantage of not relying on the traditional power grid is what we call “resiliency,” Liberati notes. “When combined with a battery, a solar panel system can maintain electricity supply during power outages,” he explains. Batteries for a solar system cost between $5,000 and $7,000.
Is it worth the investment?
The answer is “yes,” says Airth. The savings on electric bills are immediate. And “over time, the system fully pays for itself,” he notes. “The bottom line is, instead of paying for all your electricity consumption, you invest in your own energy system.” The payback period for solar is typically between seven and 10 years, he adds.
How much will you pay for electricity once you install the solar system? It depends on how much solar power your system produces and where you live. However, the savings can be significant.
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“In a productive solar month, usually in the spring and summer, the bill can be reduced to $0 or even reflect a negative amount when credits are refunded on the customer’s utility bill,” Airth explains. “In the fall and winter, when there are fewer hours of sunlight, it is possible for the utility bill to vary from 25 to 100% of your pre-solar bill.” There are many variables, he adds, such as system size and monthly energy consumption.
